Source: Iris Integrated Risk Management
Werner Hürlimann of Iris Integrated Risk Management explores the issues surrounding fair value and risk adjusted premium on a robust, parameter-free pricing principle.
For the space of all feasible risks with arbitrary mean and standard deviation and a fixed limit, the use of the rule of thumb "actuarial premium = mean + half of standard deviation" is justified. It is shown that this actuarial premium coincides with the maximum of the minimum risk adjusted premium obtained from a simple solvency model under the assumption that the supervising authority chooses the minimum level of "fair" actuarial premium and values the insolvency risk with the risk-neutral distortion risk measure.
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